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Why I agree with (some of) Friedrich Hayek

There are some inconsistencies in the Chicago School brand of economics, the author writes. | AP Photo
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In my theory of reflexivity I assert that the thinking of economic agents serves two functions. On the one hand, they try to understand reality; that is the cognitive function. On the other, they try to make an impact on the situation. That is the participating, or manipulative, function.

The two functions connect reality and the participants’ perception of reality in opposite directions. As long as the two functions work independently of each other they produce determinate results. When they operate simultaneously they interfere with each other. That is the case not only in the financial markets but also in many other social situations.

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I call the interference reflexivity. Reflexivity introduces an element of unquantifiable uncertainty into both the participants’ understanding and the actual course of events.

This two-way connection works as a feedback loop. The feedback is either positive or negative. Positive feedback reinforces both the prevailing trend and the prevailing bias — and leads to a mispricing of financial assets. Negative feedback corrects the bias. At one extreme lies equilibrium, at the other are the financial “bubbles.” These occur when the mispricing goes too far and becomes unsustainable — boom is then followed by bust.

In the real world, positive and negative feedback are intermingled and the two extremes are rarely, if ever, reached. Thus the equilibrium postulated by the efficient market hypothesis turns out to be an extreme — with little relevance to reality.

Frank Knight was the first to identify the unquantifiable uncertainty inherent in financial markets. John Maynard Keynes and his followers elaborated his insight.

Classical economists, by contrast, sought to eliminate the uncertainty connected with reflexivity from their subject matter. Hayek was one of them.

The methodological debate in Economica took place in the context of the larger political controversy over the role of the state in the economy. Hayek was on one side, Keynes and socialist planners on the other.

But Hayek subordinated his methodological arguments to his political bias. That is the source of his inconsistency. In the Economica, he attacked scientism. But after World War II, when the communist threat became more acute, he overcame his methodological qualms and became the apostle of market fundamentalism — with only a mild rebuke for the excessive use of quantitative methods in his Nobel Prize acceptance speech.

Because he was fighting communism, a scientific theory that proved that market participants pursuing their self-interest assure the optimum allocation of resources was too convenient for him to reject. But it was also too good to be true.

I will take Milt Friedman OVER Soros any day.........Soros DESTROYS economy's.

"The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe. Instead of using its powers to offset the depression, it presided over a decline in the quantity of money by one-third from 1929 to 1933 ... Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government. —Milton Friedman

If you want to see capitalism in action, go to Hong Kong.

He wrote in 1990 that the Hong Kong economy was perhaps the best example of a free market economy.

A return to a gold standard as neither desirable nor feasible........with the one exception that it might become feasible if the doomsday predictions of hyperinflation under our present system should prove correct.

Would Karl Popper approve of the founder of SDS heading the "Open Society Institute"?

What right wing babbling point website did you get this nonsense from? SDS didn't have a "founder". It was started by a committee within the League for Industrial Democracy as the LID's youth wing, and was expelled from LID a few years later. I could name a few dozen people who might be considered as original SDS leadership, but it had existed for quite a few years, with quite a few shifts in political philosophy before most people even knew it existed.

I'm pretty certain, though, that Popper would think that the modern crop of right-wingers are intellectually stunted mediocrities.

Human fallibility exists. That principle applies equally to the person making a decision as an economic agent and the person or group in charge of "regulating" the decisions of economic agents to manage "reflexivity". When some economic agents make mistakes, some economic agents pay the price. When some group in charge of "regulating" or "directing" the decisions of all economic agents errs, everyone pays the price. Let's not forget, to have a group "regulating" or "directing", you have to impose taxation, which also has an impact on price- one that has hardly any real economic value.

Mises does a pretty good job logically completing Hayek's free market argument with an interplay of money and credit. With the disintegration of the centrally planned system in our direct path, I hope the austro-libertarian position has a seat at the table.

Another observation - at any point in time we always firmly believe the "standards of political discourse" in our democracy have reached a new low compared to some fictional past time where everybody respected opinions that disagree with our own.

Generally we feel most strongly about this "new low" having been reached when there is a larger, more vocal, opinion against our own deeply held views.

The economic house of cards started tumbling on June 26, 2008, when Senator Chuckie Schumer leaked a memo questioning the solvency of IndyMac bank.

This memo precipitated a run on IndyMac which led to its failure

Warnings of IndyMac's vulnerability resulted in something of a bank run.

In July 2008 ..........Indymac bank worth $32 billion was taken over by the Federal Government.

Jan 2, 2009, a seven-member group of investors agreed to buy the remnants of failed lender IndyMac for $13.9 billion.

They included George Soros, Christopher Flowers, Michael Dell and several other powerplayers purchased the failed IndyMac Bank from the FDIC a $9 billion loss for the Fed.

Soros and partners got their hands on Indymac, with sweetheart deals(loss sharing agreements) and have subsequently been provided with more government seized assets, along with more government "sweetheart deals", which doubled the OneWest banks branches in less than a year.

The New York Times said the deal was unusual because if completed it would be one of the FIRST CASES of a private equity firm buying a bank holding company

A few months after the OneWest purchase, the bank was allocated ........$2.2 Billion in Tarp funds.

OneWest purchased all current residential mortgages at 70% par value.

FDIC guaranteed anywhere from 80-95% from any losses OneWest might occur based on the original outstanding loan balance.

If a home has a loan amount of $500,000, One West would pay $350,000.

If the owner is offered $250,000 cash in a "short sale," OneWest can report a $250,000 loss based on the original loan and receive a check from Uncle Sam for $200,000.

Add that to the $250,000 ....short sale......price offer and OneWest earns a grand total of $450,000 and a nifty 100 grand profit.

Now why is Chuckie in bed with Soros?

What did Chuckie gain and how much money did we the TAXPAYERS lose because of Chuckie and his buddy Soros?

When some group in charge of "regulating" or "directing" the decisions of all economic agents errs, everyone pays the price.

Of course when regions, nations, or the entire globe can be affected materially by a handful of individuals or corporations, regulation is necessary. The SEC is the best thing ever to happen to American investors. If you want a decent short description of the way publicly traded companies operated prior to the 1930s read the first chapter of Philip Fisher's Common Stocks, Uncommon Profits. It was written in 1957, when Fisher had already been an equity analyst for over 30 years. Prior to regulation companies were run like hereditary monarchies, with no inclination to open disclosure.

And let's not forget that one of the most vigorous champions of deregulation in the 1990s was Ken Lay. We know how that turned out.

The EPA, the FDA, the SEC, and dozens of other regulatory bodies perform a great service. Caveat Emptor is an insane way to run a major economy.

#13: what about when that group of individuals is the Federal Reserve, Fannie Mae & Freddie Mac? what about when the government employs a foreign policy that wastes tons of resources & threatens our way of life? what about when a government wastes tons of money protecting people from themselves with a terribly flawed war on drugs? the only monopoly in a free society is the government. regulation, taxation & the coercive force of a bought & paid for government are the reasons why we have so few competitors in industries, not the other way around. the stock market itself is not a function of a free society. shareholders don't have stewardship power over the board who are in bed with management. it is a completely twisted system, by design of government coercion I might add. you place all of this credence in the credibility and benefit of all these great government agencies. has pollution been eradicated since the EPA? has the quality & nutrition of our food gone up since the FDA & USDA? has outright corporate theft diminished since the institution of the SEC or the Fed? are banks more stable because of the FDIC & the Fed? i actually think we are worse off with all of these protections than if we allowed property owners to simply enforce their property rights with a good system of contract law, not one that benefits the political contributors.

I wonder if the right-wing nuts (there's that invective language again that you are so fond of) at Cato disrupted the speech and demonstrated with vile signs?

One thing you seem to have missed is that the poster questioned why Politico ran the Soros article. That very question tells me that he (or she) never bothered to even read the article. In fact I don't see much evidence any of you bothered to read the article. It seems to be more fun to type right wing talking points about Soros.